These four factors could drive quarterly earnings for JPMorgan and Wells Fargo

Published Thu, Jan 13 202211:46 AM EST

Bank stocks have been on a tear lately, thanks to surging interest rates. After jumping 37% last year, the KBW Bank Index has continued to climb, rising 11% so far in 2022. Banks have gotten attention as Treasury yields rose in recent weeks amid signs that the Federal Reserve will be more aggressive raising rates. Analysts say the industry's run will likely continue, thanks to a rebound in loan growth and expectations that the Fed could raise rates three or more times this year. Banks typically outperform other industries during rising-rate periods, according to veteran analyst Betsy Graseck of Morgan Stanley. That's because higher rates allow banks to charge borrowers more for loans while they typically boost the rates paid to depositors more slowly. That dynamic increases banks' net interest margin, a key measure of profitability for the industry, and allows the companies to invest in higher-yielding securities. JPMorgan Chase kicks off fourth-quarter earnings at 6:45 am Friday, followed by releases from Wells Fargo and Citigroup . Goldman Sachs , Bank of America and Morgan Stanley report results next week. Here's what to look out for: 1. Loan growth Banks' loan portfolios took a hit during the pandemic because government stimulus programs injected billions of dollars into consumer and business accounts. The tide began to turn in the middle of last year, and by the fourth quarter, corporate loans jumped 6.3% on a sequential basis, according to Fed data. That's the strongest growth in a decade, driven by corporations' need to rebuild inventories and invest in capital improvements, according to JPMorgan analyst Vivek Juneja. Thanks to strong demand from businesses and a pick-up in credit card loans, overall loans are expected to jump 3.3% for the industry, according to the Fed. 2. Interest income Thanks to loan growth, net interest income should rise by about 5% in the fourth quarter, according to Goldman Sachs analyst Richard Ramsden. Analysts will be keen to ask bank executives what their expectations are for loan growth and how aggressively they will invest in interest-bearing securities over the course of 2022. 3. Wall Street Broadly speaking, the pandemic has been good for both investment bankers and traders, who dealt with robust market activity and record levels of transactions. The fixed-income boom has slowed down, however, and trading revenues are expected to drop 12% from the year-earlier quarter. Strong investment banking revenue, expected to be 19% higher thanks to high levels of SPAC activity, as well as robust wealth management fees (predicted to rise 18%) should more than make up for weakness in trading. 4. Credit quality Banks set aside tens of billions in reserves for loan losses at the onset of the pandemic. They've been releasing them the past year as a spike in losses didn't materialize. The pace of reserve releases is slowing, and some consumer-centric players like American Express may actually build reserves, according to Graseck. Banks will release about $3 billion in reserves in the quarter, according to a Goldman estimate, down about 50% from the third quarter. Meanwhile, while borrowers' charge-off and delinquency rates have been at historic lows, they are beginning to creep upwards, Wells Fargo CEO Charles Scharf said last month.

A combination file photo shows Wells Fargo, Citibank, Morgan Stanley, JPMorgan Chase, Bank of America and Goldman Sachs.

Reuters

Bank stocks have been on a tear lately, thanks to surging interest rates.